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Vertical Agreements 2013

Contributing editor Steven Kinsella OBE Sidley Austin LLP

Business development managersAlan LeeGeorge IngledewRobyn HorsefieldDan White Marketing managerRachel Nurse Marketing assistantsMegan FriedmanZosia DemkowiczCady AtkinsonRobin Synnot Administrative assistantsParween BainsSophie Hickey Marketing manager (subscriptions) Rachel Nursesubscriptions@ gettingthedealthrough.com Head of editorial production Adam MyersProduction co-ordinator Lydia Gerges Head of production Jonathan Cowie Chief subeditor Jonathan Allen Senior subeditor Caroline RawsonSubeditors Harry Phillips Tim Beaver Editor-in-chief Callum Campbell Publisher Richard Davey

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United Kingdom Stephen Kinsella OBE, David Went, Patrick Harrison and Rosanna Connolly Sidley Austin LLP 291

United States Joel Mitnick Sidley Austin LLP 303

Sidley Austin LLP ChinA

www.gettingthedealthrough.com 57

ChinaChen Yang and Lei Li

Sidley Austin LLP

Antitrust law

1 What are the legal sources that set out the antitrust law applicable to

vertical restraints?

China’s main competition legislation is the Antimonopoly Law of the People’s Republic of China (PRC) (2007), which entered into force on 1 August 2008.

Vertical restraints are classed as a type of ‘monopolistic con-duct’ under the Antimonopoly Law, and the two enforcement agencies having power in relation to monopolistic conduct, the State Administration for Industry and Commerce (SAIC) and the National Development and Reform Commission (NDRC), issued agency rules in 2009 and 2010, which are directly applicable to ver-tical restraints. These agency rules include:• SAICRulesonProceduresofAdministrationsforIndustryand

Commerce for Investigation of Monopoly Agreements and Abuse of Market Dominance Cases, promulgated on 26 May 2009 and effective on 1 July 2009;

• NDRCRulesagainstPricing-relatedMonopolies,promulgatedon 29 December 2010 and effective on 1 February 2011;

• NDRC Rules on Administrative Enforcement Procedures forPricing-related Monopolies, promulgated on 29 December 2010 and effective on 1 February 2011; and

• SAICRulesofAdministrationsforIndustryandCommerceonProhibition of Monopoly Agreement Acts, promulgated on 31 December 2010 and effective on 1 February 2011.

In addition to the Antimonopoly Law, certain other laws and regu-lations also have provisions regulating vertical restraints, including notably:• Anti-UnfairCompetitionLawofthePRC(1993);• PriceLawofthePRC(1997);• ContractLawofthePRC(1999)asamended;• Administrative Measures for Fair Transactions between

Retailers and Suppliers (2006) (Fair Transaction Administrative Measures);

• ProvisionalMeasuresfortheProhibitionagainstMonopolisticPricing (2003) (Anti-Monopolistic Pricing Measures);

• RegulationonthePreventionofBelow-CostDumpingConduct(1999);

• JudicialInterpretationoftheLawAppliedtoDisputesArisingfrom Technology Contracts (2004);

• Regulation on the Administration of Import and Export ofTechnologies (2001); and

• ProvisionsontheProhibitionofRegionalBlockadesinMarketEconomyActivities(2001).

TherearealsorulesimplementingtheAnti-UnfairCompetitionLawissued by several local governments (including Beijing, Shanghaiand Shenzhen). This chapter considers only the rules adopted at a national level.

It is unclear whether the Antimonopoly Law will replace the pertinent provisions in prior legislation such as the Anti-Unfair Competition Law and the Price Law orwill coexistwiththem. However, if any conflict occurs between the terms of the Antimonopoly Law and previous laws, the Antimonopoly Law should in principle prevail. For the sake of completeness, and given that the competition authorities have not at this stage issued suffi-cient relevant guidance on the Antimonopoly Law, in the remainder of this chapter we assume that the provisions in other laws continue to apply.

Where a party occupies a dominant market position in one of the markets to which the vertical agreement relates, articles 17 to 19 of the Antimonopoly Law may also be relevant to the antitrust assessment of a given vertical restraint. The SAIC has also promul-gated an agency rule to implement these articles in the Antimonopoly Law. However, these provisions are considered in Getting the Deal Through – Dominance and are therefore not covered here. A similar approach is taken in relation to the provisions in the Price Law and its implementing measures, which may apply only to companies in a dominant market position and so are not considered in detail in this chapter.

Types of vertical restraint

2 List and describe the types of vertical restraints that are subject to

antitrust law. Is the concept of vertical restraint defined in the antitrust

law?

The Antimonopoly Law does not define the concept of vertical restraint. Nonetheless, while the concept of ‘vertical’ is not further explained, theAntimonopoly Law contains the concept of ‘hori-zontal’agreement(namely,anagreementbetweencompetitors).Byimplication, a ‘vertical’ agreement would be any agreement between trading partners other than horizontal agreements.

Legal objective

3 Is the only objective pursued by the law on vertical restraints

economic, or does it also seek to promote or protect other interests?

In general, the Antimonopoly Law pursues multiple objectives,which cover both micro-economic efficiency and macro-economic development.Specifically,theseobjectivesare:• topreventandprohibitmonopolisticconduct;• toprotectmarketcompetition;• topromoteefficiencyofeconomicoperations;• tosafeguardtheinterestsofconsumersandthegeneralpublic;

and • to promote the healthy development of the socialist market

economy.

China Sidley austin LLP

58 Getting the Deal Through – Vertical Agreements 2013

Itwouldappeartheseobjectiveswouldalsoapplytotheregulationof vertical restraints.

In addition, article 15 of the Antimonopoly Law provides the possibility to exempt ‘monopoly’ agreements, including verticalones, if certain conditions are fulfilled. Many of these conditions arenotpurelyeconomic.Theyinclude,forexample,socialinterests(such as energy saving, environmental protection and disaster relief), alleviation of serious decreases in sales volumes or overcapacities during recession and the safeguard of legitimate interests in foreign trade and foreign economic cooperation.

Responsible authorities

4 Which authority is responsible for enforcing prohibitions on anti-

competitive vertical restraints? Where there are multiple responsible

authorities, how are cases allocated? Do governments or ministers

have a role?

According to notices issued by the State Council, the National Development and Reform Commission (NDRC) and the State Administration of Industry and Commerce (SAIC) are responsible for enforcing the prohibitions on anti-competitive vertical restraints under the Antimonopoly Law. NDRC is in charge of investigating and sanctioning anti-competitive vertical restraints related to pric-ing.Atpresent,theonlyprohibitionsexplicitlyprovidedforintheAntimonopolyLawareresalepricemaintenanceandthefixingofminimumresaleprices.SAIChasjurisdictionoveranti-competitivevertical restraints not related to pricing. SAIC has delegated some powerstoitslocalbureaux,anditispossiblethatNDRCwilldolikewise.

Different ministries and bodies enforce the competition provi-sionscontainedinotherlaws.Forexample,SAICanditslocalbureauxare responsible for enforcing the provisions of the Anti-UnfairCompetition Law and the Several Provisions for the Prohibition of PublicUtilities Enterprises fromRestrictingCompetition,while anumber of bodies share the competence to enforce the provisions of the Fair Transaction Administrative Measures.

Jurisdiction

5 What is the test for determining whether a vertical restraint will

be subject to antitrust law in your jurisdiction? Has the law in your

jurisdiction regarding vertical restraints been applied extraterritorially?

Has it been applied in a pure internet context and if so what factors

were deemed relevant when considering jurisdiction?

The test is whether the vertical restraint has the effect of eliminat-ing or restricting competition within the Chinese market. Where the activity takes place, in or outside China, is not a relevant factor.

At the time of writing, there has been no published decision in whichtheAntimonopolyLawwasappliedextraterritorially,orthatconsidersindetailthejurisdictionalreachoftheAntimonopolyLawinapureinternetcontext.

Agreements concluded by public entities

6 To what extent does antitrust law apply to vertical restraints in

agreements concluded by public entities?

In principle, the Antimonopoly Law and the competition provisions in other laws and regulations (including provisions relating to verti-cal agreements) apply irrespective of the ownership of an entity.

Most laws containing competition provisions, including the AntimonopolyLaw,theAnti-UnfairCompetitionLawandthePriceLaw,stipulatethatany‘undertaking’issubjecttothoseprovisions.The Antimonopoly Law defines an undertaking as a natural person, legal person or other organisation that engages in the manufacture or sale of products or the provision of services. No reference is made

to the ownership of the undertaking. TheAnti-UnfairCompetitionLawcontainsasimilardefinition,

but refers to commercial operations related to goods or ‘profitable’ services.Inthepast,theSAIC,itslocalbureauxandthecourtshaveheld hospitals and universities to be undertakings for the purposes of the Anti-Unfair Competition Law. It is possible that NDRC,SAIC and the courts will reach a similar finding in relation to the Antimonopoly Law.

The Antimonopoly Law also prohibits administrative authori-ties and organisations from taking certain steps that might restrict competition, including the impositionof exclusivedealingobliga-tions. The Antimonopoly Law does not have any provision that pro-videsexemptionorspecialtreatmenttopublicentities.

Article 7 of the Antimonopoly Law establishes a particular sys-tem for state-owned enterprises in industries vital to the national economyandnationalsecurityandindustriessubjectatlawtoexclu-siveoperationsandsales.Thiscomplexprovisionseemstomakethepricingpolicyofsuchenterprisessubjecttogovernmentinterventionand,possibly,exemptthemfromtheAntimonopolyLaw.

Sector-specific rules

7 Do particular laws or regulations apply to the assessment of vertical

restraints in specific sectors of industry (motor cars, insurance, etc)?

Please identify the rules and the sectors they cover.

Some regulations enacted before the inception of the Antimonopoly Law address vertical restraint issues in specific industry sectors. These regulations have very rarely been enforced, if at all, and it remains uncertain how they will be enforced following the imple-mentation of the Antimonopoly Law.Sectorssubjecttospecificrulesinclude,interalia,certaindefined

public utilities, telecommunications, civil air transport and interna-tional maritime transport. The sector-specific sources relevant to those industries are: • Several Provisions for the Prohibition of Public UtilitiesEnterprisesfromRestrictingCompetition(1993),whichapplyto public utilities enterprises (such as postal services, certain tele-coms services, transport, water supply and energy supply);

• Telecommunication Regulation of the PRC (2000), whichapplies to the telecommunications industry;

• Regulation on the Prohibition of Anti-Unfair CompetitionPractices in Civil Air Transportation Market (1996), which applies to the civil air transport industry; and

• RegulationofthePRConInternationalOceanShipping(2001),which applies to international maritime transport.

General exceptions

8 Are there any general exceptions from antitrust law for certain types of

agreement containing vertical restraints? If so, please describe.

Article 15 of the Antimonopoly Law lists the circumstances under whichanagreementcontainingaverticalrestraintcanbeexemptedfrom the prohibition of article 14. These circumstances are:• improvingtechnologyorresearchanddevelopment(R&D)of

new products; • improvingproductquality,reducingcosts,enhancingefficiency,

harmonising product specifications and standards, or dividing work based on specialisation;

• improvingtheoperationalefficiencyandenhancingcompetitive-ness of small and medium-sized enterprises;

• serving social public interests such as energy saving, environ-mental protection and disaster relief and aid;

• alleviatingseriousdecreasesinsalesvolumesorsignificantpro-duction overcapacities during economic recession; and

• safeguarding legitimate interests in foreign trade and foreigneconomic cooperation.



If a company wishes to argue that the prohibition of article 14 should be disapplied, it bears the burden of proof to show that the agreementinquestionfulfilsoneofthesecircumstances.Ifitclaimsthatoneofthefirstfivecircumstancesexists,thecompanymustalsoprove that the agreement does not significantly restrict competition in the relevant market and allows consumers a share of the resulting benefit.

Agreements

9 Is there a definition of ‘agreement’ – or its equivalent – in the antitrust

law of your jurisdiction?

The Antimonopoly Law and the competition provisions in other laws or regulations do not contain a precise definition of an ‘agree-ment’. Nonetheless, article 13 of the Antimonopoly Law defines a ‘monopoly agreement’ as an ‘agreement, decision or other concerted practice which eliminates or restricts competition’. The SAIC Rules of Administrations for Industry and Commerce on Prohibition of Monopoly Agreement Acts further provide that a monopoly agree-ment may be entered into between business undertakings either directly or through the coordination of industry associations.

10 In order to engage the antitrust law in relation to vertical restraints,

is it necessary for there to be a formal written agreement or can the

relevant rules be engaged by an informal or unwritten understanding?

The agreement does not need to be in written form. The SAIC Rules of Administrations for Industry and Commerce

onProhibitionofMonopolyAgreementActsexplicitlyprovidethata ‘monopoly agreement’ may be in written, oral and tacit forms (ie, a ‘concerted practice’).

These rules provide that the ‘concerted practice’ means a prac-ticewherecoordinationandconcordanceexistbetweentherelevantbusinessundertakingsalthoughthereisnoexplicitwrittenororalagreement or decision, and also list the factors in determining a con-certed practice as follows:• whetherthepracticesinthemarkettakenbythebusinessunder-

takings have concordance;• whetherthebusinessundertakingsconductedcommunicationsorexchangeofinformation;and

• whetherthebusinessundertakingshavereasonablejustificationsfor their coordinated practice.

These rules further provide that in determining what constitutes a concerted practice, other factors need to be taken into consideration, including the structure of the relevant market, the competition situa-tion, changes in the market and the situation of the industry.

The NDRC Rules Against Pricing-related Monopolies contain similar provisions on what constitutes a ‘monopoly agreement’.

Parent and related-company agreements

11 In what circumstances do the vertical restraints rules apply to

agreements between a parent company and a related company (or

between related companies of the same parent company)?

It is unclear whether the Antimonopoly Law and the competition provisions in other laws or regulations apply to agreements between a parent and a related company. However, because one aim of the competition laws and regulations is to maintain fair market compe-tition and since such intra-company agreements would not adversely affect the wider competitive environment, it appears unlikely that Chinese competition laws and regulations would apply to such agreements.

Agent–principal agreements

12 In what circumstances does antitrust law on vertical restraints apply

to agent–principal agreements in which an undertaking agrees to

perform certain services on a supplier’s behalf for a sales-based

commission payment?

There are no provisions in the Antimonopoly Law or the competi-tion provisions in other laws or regulations that specifically address thisquestion.

13 Where antitrust rules do not apply (or apply differently) to agent–

principal relationships, is there guidance (or are there recent authority

decisions) on what constitutes an agent–principal relationship for

these purposes?

The enforcement authorities have not issued guidance, or taken decisions, on this issue.

Intellectual property rights

14 Is antitrust law applied differently when the agreement containing the

vertical restraint also contains provisions granting intellectual property

rights (IPRs)?

In principle, the provisions of the Antimonopoly Law do not apply differently if an agreement grants an IPR. Article 55 of the Antimonopoly Law states that application of the law is not precluded as a matter of principle on the grounds that an IPR is involved. Where a company restricts or eliminates competition by abusing an IPR, the provisions of the Antimonopoly Law apply.

In contrast, the competition provisions in the Contract Law and the Judicial Interpretation on Technology Contracts apply to technol-ogy contracts only. Similarly, the Regulation on the Administration ofImportandExportofTechnologiesappliesonlytotheimportandexportoftechnologyasdefinedbythatregulation.Article10oftheJudicial Interpretation on Technology Contracts prohibits the inclu-sion in agreements of clauses restricting the freedom of a technology recipienttoundertakeR&Dorclausesimposinginequitablecondi-tions for sharing improvements of the technology.

Analytical framework for assessment

15 Explain the analytical framework that applies when assessing vertical

restraints under antitrust law.

There is no uniform analytical framework that applies to the assess-ment of all vertical restraints under Chinese antitrust law. Rather, the various legal instruments provide limited information on the ana-lyticalapproachthatshouldbeexpectedinrelationtothespecifictypes of conduct they cover. The instruments set out below cover the potentialinfringementsidentified.Whereappropriate,explanationsof likely analytical frameworks are provided.

Antimonopoly LawArticle 14 of the Antimonopoly Law identifies as illegal:• resalepricemaintenance–thefixingofresalepricesofproducts

sold to third parties; and• fixingofminimumresaleprice–thefixingofminimumresale

prices of products sold to third parties.

Article 14 of the Antimonopoly Law also empowers NDRC and SAIC to prohibit other vertical restraints that they consider to be anti-competitive.

The general analytical framework underpinning the assessment of vertical restraints under the Antimonopoly Law is the follow-ing: ifNDRCorSAICfinds thatanagreementfixesresalepricesor minimum resale prices, it is likely to conclude that article 14 of



the Antimonopoly Law is breached. However, the parties can still argue that the prohibition in article 14 should be disapplied on the grounds that the agreement fulfils one of the circumstances listed in article 15 of the Antimonopoly Law, or has other beneficial effects whicharenotexplicitlylisted.Inaddition,thepartiesmustprove,as a general rule, that the agreement does not significantly restrict competition in the relevant market and allows consumers a share of the resulting benefit. This same analysis would, in principle, apply foralltypesofverticalrestraintsexaminedundertheAntimonopolyLaw,whethertheexplicitlyprohibitedresalepricemaintenanceandminimumresalepricefixing,oradditionalyetunspecifiedrestraintswhich NDRC or SAIC finds to be in breach of article 14.

Anti-Unfair Competition LawTheAnti-UnfairCompetitionLawidentifiesasillegal:• predatory pricing – below-cost saleswith the aim to excludecompetitors(exceptforfreshandlivegoods,perishablegoodsbefore expiry date and reductionof excessive stock, seasonalsales, or clearance of debts and change or suspension of business operations); and

• tie-insales–tyingthesaleofcertainproductstothesaleofotherproducts, with the result that a purchaser is forced to purchase goods against its will, or attaching other unreasonable condi-tions to the sale of a product.

Atpresent,itisnotclearwhethertheseprovisionsintheAnti-UnfairCompetition Law continue to apply after the entry into force of the Antimonopoly Law. The latter law censures predatory pricing and tie-in sales only where the company at issue is in a dominant market position.

Contract Law and Judicial Interpretation on Technology ContractsThe Contract Law and the Judicial Interpretation on Technology Contracts identify the monopolisation of technology and the restric-tion of technological improvements as illegal. This includes the fol-lowing practices:• restrictingtechnologicalimprovementsmadebyonepartytoatechnologycontractorprovidingforaninequitablesharingofsuch technological improvements;

• restrictinga technologyrecipient’sprocurementof technologyfrom other sources;

• unfairly limiting the volume, variety, price, sales channels,or exportmarkets of the technology recipient’s products andservices;

• requiring the technology recipient topurchaseotherunneces-sary technology, rawmaterials,products,equipment, services,etc;

• unjustlyrestrictingthetechnologyrecipient’soptionsforsourc-ingsuppliesofrawmaterials,partsorequipment;or

• prohibiting or restricting the technology recipients’ ability tochallenge the IPR at issue in the technology contract.

For technology import-export contracts, the Regulation on theAdministration of Import and Export of Technologies containssimilar prohibitions to the Judicial Interpretation on Technology Contracts.

Fair Transaction Administrative MeasuresThe Fair Transaction Administrative Measures only apply to certain types of vertical agreements, that is, where the buyer is a retailer selling to end-consumers and where its sales are above 10 million renminbi. They prohibit:• pricerestrictionsuponsuppliers–wheretheretailerrestrictsthe

prices at which the supplier can sell products to other companies or consumers;

• exclusivedealing imposeduponsuppliers–where the retailerrestricts the supplier’s sales to other retailers;

• tie-insalesimposeduponretailers–wherethesuppliertiesthesale of a product with other products that the retailer did not order; and

• exclusivedealing imposeduponretailers–where the supplierrestricts the retailer’s freedom to purchase from other suppliers.

In addition, if a retailer is in an ‘advantageous position’, it is pro-hibited from imposing an obligation upon its suppliers to purchase products designated by it.

However, according to article 23, the Fair Transaction Administrative Measures only apply where no law or regulation regulates the same conduct. It remains to be seen how the Fair Transaction Administrative Measures will be deemed to interact with the Antimonopoly Law and, in particular, with articles 14 and 15 thereof.

Provisions on the Prohibition of Regional Blockades in Market Economy ActivitiesTheProvisionsontheProhibitionofRegionalBlockadesinMarketEconomyActivities essentially aim to curb barriers to entry intoregional markets that are erected by local governments and public authorities. They may also apply to the conduct of companies, in particular prohibiting: territorial restrictions on sales within China –restrictingthe‘import’ofproductsandconstructionservicesorigi-natinginotherregionswithinChina.However,theexactscopeofthis prohibition remains unclear.

16 To what extent are supplier market shares relevant when assessing

the legality of individual restraints? Are the market positions and

conduct of other suppliers relevant? Is it relevant whether certain

types of restriction are widely used by suppliers in the market?

As a general rule, the Antimonopoly Law and the competition pro-visionsinotherlawsorregulationsdonotrequiretheenforcementagencies to take account of market shares, market structures and other economic factors in their assessment of the legality of indi-vidualrestraints.Forexample,article14oftheAntimonopolyLawprohibitsresalepricemaintenanceandthefixingofminimumresaleprices without referring to these factors. Nonetheless, under article 15,theavailabilityofexemptionsforagreementscontainingverticalrestraints refers, inter alia, to economic factors such as the improve-mentofproductquality,costreductionsandefficienciesandrequiresthat the agreements do not significantly restrict competition in the relevantmarket.Toacertainextent,theseconditionsmaybeinter-pretedasanimplicitrequirementupontheenforcementagenciestotake into account economic factors including market shares when assessing the legality of vertical restraints.

17 To what extent are buyer market shares relevant when assessing the

legality of individual restraints? Are the market positions and conduct

of other buyers relevant? Is it relevant whether certain types of

restriction are widely agreed to by buyers in the market?

The Antimonopoly Law does not address these issues.

Block exemption and safe harbour

18 Is there a block exemption or safe harbour that provides certainty

to companies as to the legality of vertical restraints under certain

conditions? If so, please explain how this block exemption or safe

harbour functions.

TheAntimonopolyLaw,theAnti-UnfairCompetitionLawanditsimplementing measures do not contain any safe harbours, and there arecurrentlynoblockexemptions.



Types of restraint

19 How is restricting the buyer’s ability to determine its resale price

assessed under antitrust law?

Article14oftheAntimonopolyLawprohibitsasupplierfromfix-ing the buyer’s resale price or minimum resale price. Nonetheless, an agreementcontainingsucharestrictioncanbeexemptedifthecon-ditions of article 15 are met. The adoption of measures implement-ing articles 14 or 15 may give further guidance on the circumstances inwhichexemptionsmightbeavailable.

In 2012, the Shanghai No.1 Intermediate People’s Court issued ajudgmentdismissingpetitionsfromaleaddistributorofJohnson&Johnson(J&J)thataccusedJ&Jofretailpricemaintenance.Thedistributorclaimedthatinitsdistributionagreements,J&Jrequiredit to sell products to hospitals in allocated territories only, and at pricesnolowerthanminimumpricesdecidedbyJ&J.Thedistri-butionrelationshipwasterminatedbyJ&Jafteritdiscoveredthatthe distributor sold products outside its allocated territories and at prices lower than theminimumprice.Thepresiding judge, in aninterview, explained the rationaleof the court’s judgment, statingthat minimum price maintenance is not a per se violation of the Antimonopoly Law, and the court should consider whether such restriction has resulted in the elimination or restriction of com-petition. The court dismissed the distributor’s petitions because the distributor failed to prove that competition was eliminated or restricted.

In addition, it appears that NDRC conducted investigations in January 2013 into alleged resale price maintenance by spirits manu-facturers Maotai and Wuliangye. At the time of writing, NDRC had not published its official decision, but news reports state that the fine for Maotai was 247 million renminbi, while the fine for Wuliangye was 202 million renminbi, representing 1 per cent of each compa-ny’s2012 revenues.Maotai andWuliangye also agreed to adjusttheir pricing behaviour going forward.

Further, article 10(3) of the Judicial Interpretation on Technology Contracts and article 29(6) of the Regulation on the Administration ofImportandExportofTechnologiesprohibittheinclusioninverti-cal agreements of clauses restricting the price the technology recipi-ent can charge to its customers in relation to products or services developed from the transferred technology.

20 Have the authorities considered in their decisions or guidelines resale

price maintenance restrictions that apply for a limited period to the

launch of a new product or brand, or to a specific promotion or sales

campaign; or specifically to prevent a retailer using a brand as a ‘loss

leader’?

At the time of writing, there does not appear to be a decision pub-lishedbyNDRCorSAICthatspecificallyaddressesthesequestions.

21 Have decisions or guidelines relating to resale price maintenance

addressed the possible links between such conduct and other forms

of restraint?

At the time of writing, there does not appear to be a decision or guideline published by NDRC or SAIC that specifically addresses thesequestions.

22 Have decisions or guidelines relating to resale price maintenance

addressed the efficiencies that can arguably arise out of such

restrictions?

At the time of writing, there does not appear to be a decision or guideline published by NDRC or SAIC that addresses the efficiencies that can arguably arise out of resale price maintenance.

23 How is restricting the territory into which a buyer may resell contract

products assessed? In what circumstances may a supplier require a

buyer of its products not to resell the products in certain territories?

Territorial restrictions on sales appear to have formed part of the 2012 Johnson & Johnsoncase(seequestion19).TheAntimonopolyLaw prohibits a business operator with a dominant market position from ‘requiringa tradingparty to trade exclusivelywith itselfortradeexclusivelywithdesignatedbusinessoperator(s)withoutanyjustifiablecause’.Reflectingthis,theSAICRulesofAdministrationsfor Industry and Commerce on Prohibition of Abuse of Market Dominance prohibit a business undertaking from imposing unrea-sonable transaction terms on the other party to the transaction ‘with-outjustifiablecause’,andonesuchunreasonabletransactiontermisthe imposition of ‘unreasonable restrictions on the geographic area into which the goods may be sold’.The Provisions on the Prohibition of Regional Blockades in

MarketEconomyActivitiesprohibitcompaniesfromrestrictingtheimport of products and construction services originating in other regions within China, but the exact scope of this prohibition isunclear.

24 Explain how restricting the customers to whom a buyer may resell

contract products is assessed. In what circumstances may a supplier

require a buyer not to resell products to certain resellers or end-

consumers?

The SAIC Rules of Administrations for Industry and Commerce on Prohibition of Abuse of Market Dominance prohibit the imposition of ‘unreasonable transaction terms’ by a business undertaking with dominantposition‘withoutjustifiablecause’.Theruleslisttwofac-torstobeassessedindeterminationofa‘justifiablecause’,namely:• whethertheactioninquestioniscarriedoutonthebasisofthe

operator’s own ordinary business activities and its ordinary ben-efits; and

• theaction’seffectsontheefficiencyoftheeconomy’soperation,social and public interests, and economic development.

25 How is restricting the uses to which a buyer puts the contract products

assessed?

At the time of writing, neither the Antimonopoly Law nor the com-petition provisions in other laws or regulations contain general rules on such use restriction clauses contained in vertical agreements.

26 How is restricting the buyer’s ability to generate or effect sales via the

internet assessed?

At the time of writing, neither the Antimonopoly Law nor the competition provisions in other laws or regulations contain rules addressing this issue.

27 Have decisions or guidelines on vertical restraints distinguished in any

way between different types of internet sales channel?

The Antimonopoly Law, its implementation rules and enforcement decisions do not address this issue.

28 Briefly explain how agreements establishing ‘selective’ distribution

systems are assessed. Must the criteria for selection be published?

There are no rules either in the Antimonopoly Law or the competi-tion provisions in other laws or regulations that specifically address selective distribution systems.



29 Are selective distribution systems more likely to be lawful where they

relate to certain types of product? If so, which types of product and

why?

Notapplicable–seequestion28.

30 In selective distribution systems, what kinds of restrictions on

internet sales by approved distributors are permitted and in what

circumstances? To what extent must internet sales criteria mirror

offline sales criteria?


31 Has the authority taken any decisions in relation to actions by

suppliers to enforce the terms of selective distribution agreements

where such actions are aimed at preventing sales by unauthorised

buyers or sales by authorised buyers in an unauthorised manner?


32 Does the relevant authority take into account the possible cumulative

restrictive effects of multiple selective distribution systems operating

in the same market?


33 Has the authority taken decisions dealing with the possible links

between selective distribution systems and resale price maintenance

policies? If so, what are the key principles in such decisions?


34 Has the authority taken decisions (or is there guidance) concerning

distribution arrangements that combine selective distribution with

restrictions on the territory into which approved buyers may resell the

contract products?

The enforcement authorities have not issued guidance, or taken decisions, on this issue.

35 How is restricting the buyer’s ability to obtain the supplier’s products

from alternative sources assessed?

Article 13(5) of the Antimonopoly Law prohibits competing busi-nessundertakingsfrom‘jointlyboycottingtransactions’.TheSAICRules of Administrations for Industry and Commerce on Prohibition of Monopoly Agreement Acts provide further clarification on this article, prohibiting competing business undertakings from jointlyrestricting specific business undertakings from dealing with other business undertakings that compete with the business undertakings that impose such restriction.

Article 10(5) of the Judicial Interpretation on Technology Contracts and article 29(5) of the Regulation on the Administration ofImportandExportofTechnologiescanbeviewedasprohibitingtheinclusionintechnologycontractsortechnologyimport-exportcontracts of clauses that restrict the possibility for the technology recipient to obtain the supplier’s products from alternative sources. Similarly,althoughthetextisnotentirelyclear,article18(2)oftheFair Transaction Administrative Measures may be interpreted as prohibiting a supplier from restricting the retailer’s freedom to pur-chase products, including the supplier’s own products, from other sources.

36 How is restricting the buyer’s ability to sell non-competing products

that the supplier deems ‘inappropriate’ assessed?

There are no rules either in the Antimonopoly Law or the competi-tion provisions in other laws or regulations that specifically address this issue. However, the Antimonopoly Law is written in a very gen-eral manner, prohibiting not only enumerated forms of monopolistic conduct but also ‘other forms of’ unspecified monopolistic conduct. The SAIC Rules of Administrations for Industry and Commerce on Prohibition of Monopoly Agreement Acts set forth that the SAIC shall have the authority to determine other forms of monopoly agree-ments thatarenotexplicitlyprovided for in the rules.Therefore,there is a possibility the SAIC, following the general principles of the Antimonopoly Law, may determine that it is a violation of the law to restrict the buyer’s ability to sell non-competing products that the supplier deems ‘inappropriate’.

37 Explain how restricting the buyer’s ability to stock products competing

with those supplied by the supplier under the agreement is assessed.

The Antimonopoly Law does not contain any provision on such clauses where they occur in vertical agreements between parties with no dominant market position.

Article 18(2) of the Fair Transaction Administrative Measures prohibits a supplier from restricting the retailer’s freedom to pur-chase competing products from other suppliers. Furthermore, article 10(5) of the Judicial Interpretation on Technology Contracts and article 29(5) of the Regulation on the Administration of Import and Export ofTechnologies prohibit the inclusion in technology con-tractsortechnologyimport-exportcontractsofclauseslimitingthefreedom of the technology recipient to purchase competing products.

38 How is requiring the buyer to purchase from the supplier a certain

amount or minimum percentage of the contract products or a full

range of the supplier’s products assessed?

There are no provisions in the Antimonopoly Law or the competi-tionprovision inother lawsor regulations that explicitlyaddressthisquestion.However,someprovisionsmaybeinterpretedsoasto apply to clauses of this kind. In particular, the establishment of a minimumamount,orminimumpercentage,purchaserequirementcanhaveasimilareffecttotheexclusivedealingprovisionsdiscussedintherepliestoquestions35and37.Assuch,itispossiblethattheprovisions identified in these replies apply.

39 Explain how restricting the supplier’s ability to supply to other

resellers, or sell directly to consumers, is assessed.

The Antimonopoly Law does not contain any provision on such clauses where they occur in vertical agreements between parties with no dominant market position.

Article 7 of the Fair Transaction Administrative Measures pro-hibits a retailer from restricting sales of products or services by its supplier to other retailers. This provision also contains a prohibition on the retailer restricting the price that the supplier can charge when selling directly to consumers or to other companies.

40 To what extent are franchise agreements incorporating licences of

IPRs relating to trademarks or signs and know-how for the use and

distribution of products assessed differently from ‘simple’ distribution

agreements?

There are no provisions in the Antimonopoly Law or the competi-tionprovisionsinotherlawsandregulationsthatexplicitlyaddressthis question. For a discussion on the impact of clauses grantingIPRsinverticalagreements,seequestion14.



Nonetheless, according to article 5 of the Administrative Measures on Commercial Franchising, franchisors are prohibited from ‘causing’ a monopoly in the market or from restricting fair competition through franchising. Article 10(4) of the Administrative Measures on Commercial Franchising prohibits a franchisor from obligingthefranchiseetopurchaseproductsfromit,exceptwhereit is necessary to guarantee the quality of the franchise product.Nonetheless,thefranchisorisentitledtorequirethatthepurchasedproductscomplywithcertainqualitystandardsortolistanumberof suppliers from which the franchisee can choose its supplier.

41 Explain how a supplier’s warranting to the buyer that it will supply the

contract products on the terms applied to the supplier’s most-favoured

customer or that it will not supply the contract products on more

favourable terms to other buyers is assessed.

There are no provisions in the Antimonopoly Law or the compe-tition provisions in other laws and regulations that specifically addressthisquestion.

42 Explain whether and in what circumstances a supplier may apply

different prices or conditions to similarly placed buyers and explain

how, in such circumstances, the application of different prices or

conditions is assessed?

Article 17.6 of the Antimonopoly Law prohibits a business operator with a dominant market position from ‘applying dissimilar prices or other transaction terms to counterparties that are similarly placed, withoutjustifiablecause’.

The SAIC Rules of Administrations for Industry and Commerce on Prohibition of Abuse of Market Dominance provide further clar-ityon‘justifiablecause’,namely:• whethertheactioninquestioniscarriedoutonthebasisofthe

operator’s own ordinary business activities and its ordinary ben-efits; and

• theaction’seffectsontheefficiencyoftheeconomy’soperation,social and public interests, and economic development.

43 Explain how a buyer’s warranting to the supplier that it will purchase

the contract products on terms applied to the buyer’s most-favoured

supplier or that it will not purchase the contract products on more

favourable terms from other suppliers is assessed.

The Antimonopoly Law does not address this issue.

Notifying agreements

44 Outline any formal procedure for notifying agreements containing

vertical restraints to the authority responsible for antitrust

enforcement.

Neither the Antimonopoly Law nor the competition provisions in other laws and regulations provide for a notification system for agreements. However, depending on the adoption of measures implementing the Antimonopoly Law and the enforcement practice of NDRC and SAIC, it is possible that a formal or informal consul-tation procedure may be adopted.

Authority guidance

45 If there is no formal procedure for notification, is it possible to obtain

guidance from the authority responsible for antitrust enforcement

or a declaratory judgment from a court as to the assessment of a

particular agreement in certain circumstances?

Neither the NDRC, the SAIC nor the Chinese courts have disclosed any information that indicates such a possibility.

Complaints procedure for private parties

46 Is there a procedure whereby private parties can complain to the

authority responsible for antitrust enforcement about alleged unlawful

vertical restraints?

According to the Antimonopoly Law, any organisation or individual is entitled to report conduct that he or she suspects is an infringe-ment of the law. This includes vertical agreements containing clauses fixingtheresalepriceorsettingaminimumresaleprice.

NDRC and SAIC must keep the identity of the complainant confidential. If the complaint is made in writing and is supported by sufficient evidence, NDRC and SAIC are in principle under an obligation to conduct an investigation.

There are no detailed provisions on reporting procedures undertheAnti-UnfairCompetitionLaworthecompetitionprovi-sions in other laws and regulations (although the Fair Transaction Administrative Measures mention the possibility for entities and individuals to report illegal conduct to the authorities). More gener-ally, government authorities may accept complaints filed by private parties.

Enforcement

47 How frequently is antitrust law applied to vertical restraints by the

authority responsible for antitrust enforcement? What are the main

enforcement priorities regarding vertical restraints?

NDRC and SAIC authorities at national and local levels are under-stood to have taken several decisions regarding vertical restraints in violation of the Antimonopoly Law. However, they are not under a legal obligation to publish such decisions, and there is no cen-tralised database where such decisions are reported or stored. Some decisions are published but few contain enough detail to provide guidance.

In 2011, NDRC issued one decision regarding a violation of the Antimonopoly Law that appears to relate in large part to vertical restraints. In this case, two distributors of a certain active pharma-ceutical ingredient (API) entered into distribution agreements with the only two manufacturers of that API in China, pursuant to which theAPImanufacturerswererequiredtoobtainpriorconsentfromthe two distributors before selling the API to any other distributor. TheNDRCimposedmonetaryfinesandrequiredadisgorgementof profits.

In 2012, the Shanghai No. 1 Intermediate People’s Court issued ajudgmentdismissingpetitionsfromalocaldistributorofJohnson&Johnson(J&J)thataccusedJ&Jofminimumresalepricemainte-nance. The distributor claimed that in the distribution agreements, J&Jrequiredittosellproductstohospitalsinallocatedterritoriesonly,andatpricesnolowerthanminimumpricesdecidedbyJ&J.ThedistributionrelationshipwasterminatedbyJ&Jafteritdiscov-ered that the distributor sold products outside its authorised terri-tories and at prices lower than the minimum price. The presiding judge,inaninterview,explainedtherationaleofthecourt’sdecision,stating that minimum price maintenance is not a per se violation of the Antimonopoly Law, and the court should consider whether such restriction has resulted in the elimination or restriction of competition. The court dismissed the distributor’s petitions because the distributor failed to prove that competition was eliminated or restricted.

In 2013, NDRC imposed fines on two spirits manufacturers, Maotai and Wuliangye, in relation to alleged resale price mainte-nance(seequestion19).



48 What are the consequences of an infringement of antitrust law for the

validity or enforceability of a contract containing prohibited vertical

restraints?

TheAntimonopolyLawdoesnotitselfstipulatetheconsequencesof an infringement of article 14 for the validity and enforceability of a contract that contains a prohibited vertical restraint. Nonetheless, according to articles 52 and 56 of the Contract Law, such a contract is null and void, and has no legally binding force from the beginning.

However, article 56 of the Contract Law also stipulates that invalid portions of a contract will not affect the validity or enforce-ability of the rest of the contract if such portions can be severed or separated from the whole.

49 May the authority responsible for antitrust enforcement directly

impose penalties or must it petition another entity? What sanctions

and remedies can the authorities impose? What notable sanctions

or remedies have been imposed? Can any trends be identified in this

regard?

NDRC and SAIC can directly impose penalties without the involve-ment of other agencies or the courts.

If NDRC or SAIC finds that a vertical agreement violates article 14 of the Antimonopoly Law, it must order that the parties to the agreement cease giving effect to the illegal clause of the agreement,

and confiscate the gains obtained through the illegal conduct. Furthermore, NDRC and SAIC are in principle under an obli-

gation to impose a fine of 1 per cent to 10 per cent of a company’s annual turnover, unless: • theagreementisnotimplemented(inwhichcaseafineofupto

500,000 renminbi will be imposed);• the company has filed a leniency application (in which case

NDRC and SAIC can grant immunity or impose a reduced pen-alty); or

• the company makes specific commitments that eliminate thenegative effects of the agreement (in which case, in principle, no fine will be imposed).

Underthecompetitionprovisionsinotherlawsandregulations,theenforcement authorities normally impose two types of sanctions, that is, the cessation of the illegal conduct and the imposition of penalties. If a company has obtained illegal gains, the authorities may also confiscate those gains. In addition, if the illegal conduct is serious, the authorities may suspend the company’s business licence.

Courts can also hear cases alleging the illegality of clauses inserted in vertical agreements in actions for damages.

Investigative powers of the authority

50 What investigative powers does the authority responsible for antitrust

enforcement have when enforcing the prohibition of vertical restraints?

UndertheAntimonopolyLaw,NDRCandSAIChavethefollowingpowers when investigating alleged infringements, including those relating to vertical agreements:• toconducton-the-spot-inspectionsatthebusinesspremisesof

the companies under investigation or other relevant places;• tointerrogatethecompaniesunderinvestigation,interestedpar-tiesandotherrelevantparties,andrequestthattheyexplainallrelevant circumstances;

• toexamineandtakecopiesoftherelevantdocumentsandinfor-mation of the companies under investigation, interested parties or other relevant entities or individuals, such as agreements, accounting books, faxes or letters, electronic data, and otherdocuments and materials;

• tosealandretainrelevantevidence;and• toinvestigatethecompanies’bankaccounts.

The investigation must be carried out by at least two of NDRC’s or SAIC’s enforcement officials who are to present their creden-tials for the investigation. The officials must keep a written record of the inspection to be signed by the companies being investigated. NDRC and SAIC must maintain the confidentiality of any business

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The Johnson & Johnson decision (see question 47) is the first decision in which a Chinese court has ruled on the maintenance of minimum resale prices, and provides important assurance to companies that such conduct is not a per se violation of the law. However, NDRC’s January 2013 decision in relation to spirits manufacturers Maotai and Wuliangye suggests that resale price maintenance may be an agency enforcement priority going forward.

On 3 May 2012, the Chinese Supreme People’s Court issued a judicial interpretation – Rules on Civil Actions under the Antimonopoly Law – which became effective on 1 June 2012. The Rules laid out the framework for private antitrust claims in China, and clarified key issues in connection with such claims, such as competent courts, capacities of complainants and burden of proof. The Rules are likely to encourage private antitrust claims in China.

As to future developments, SAIC is in the process of drafting a Guideline on Antimonopoly Law Enforcement in the Field of Intellectual Property Rights. A fifth draft of the Guideline was circulated for comment in 2012. The Guideline, after promulgation, would provide guidance on key antitrust issues, including issues relating to vertical restraints, in transactions involving intellectual property rights.

Update and trends



secrets collected during the investigation. Among the other laws andregulationscontainingcompetitionrules,onlytheAnti-UnfairCompetition Law specifies the agency’s investigative powers. The Anti-UnfairCompetitionLawprovidesSAICanditslocalbureauxwith the following powers when investigating unfair competition practices:• tointerrogatecompanies, interestedpartiesandwitnessesandrequirethemtosupplyevidenceorotherdocumentsrelatedtothe alleged unfair practices;

• toexamineandtakecopiesofagreements,accountingbooks,documents,records,faxesorlettersandothermaterialsrelatedto the alleged unfair practices; and

• toexaminepropertyconnectedwiththesuspectedinfringementsand, where necessary, order the companies under investigation tosuspendsalesandtoprovidedetailsonthesourceandquan-tityofproductsobtained.Pendingexamination,suchpropertycannot be removed, concealed or destroyed by the company.

Private enforcement

51 To what extent is private enforcement possible? Can non-parties

to agreements containing vertical restraints obtain declaratory

judgments or injunctions and bring damages claims? Can the parties

to agreements themselves bring damages claims? What remedies are

available? How long should a company expect a private enforcement

action to take?

Non-parties to a monopolistic agreement can bring damages claims if they have suffered losses due to an anti-competitive clause contained

inaverticalagreement.TheAntimonopolyLawandrelevantjudi-cial interpretationsdonot explicitly address the issueofwhetherparties to an agreement can bring damages claims. However, the Supreme People’s Court of China has stated that ‘only if [...] there is a dispute arising from the content of an agreement […]the complain-antmayfileanactionandrequestthepersonthattakesmonopo-listic conducts to assume civil liabilities’. Such a statement seems to authorise a party to a monopolistic agreement to bring damages claims in court.Suchcasesaregenerallyexpectedtobedecidedbytheintermedi-

atecourts.Injunctionsanddamagescanbegranted.Generally, the adjudication is to bemadewithin sixmonths

from the acceptance by the court of the case, with the possibility ofextensionforanothersixmonthsuponapproval.Forexpeditedsummary procedures, adjudication is made within three monthswithoutapossibilityofextension.Successfulpartiescanalsorecoverfrom losing parties the legal costs charged by the court.

Other issues

52 Is there any unique point relating to the assessment of vertical

restraints in your jurisdiction that is not covered above?

Not applicable.


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